The Day Ahead: Markets Cautious As FOMC Meeting Begins

It was a slow yesterday with no fresh data, and markets reacted by edging down following a four-week rally. Today is looking like a repeat performance, as equity futures continue to point moderately south 90 minutes ahead of the opening bell. 

But, there are a couple of items separating today from Monday. First, the Federal Reserve’s Open Market Committee meeting begins today, and though the official policy announcement won’t come out until tomorrow, traders will be anticipating a more upbeat policy statement. Secondly, some new data hits the trading floor at 8:30, showing that productivity per worker hour was on the rise in the second quarter, a factor helping companies’ earnings statements over the past few weeks.

Thirdly, as economist Jennifer Lee from BMO Capital Markets points out it a morning note, a huge swathe of data from China hit markets this morning.

“Markets are assuming a cautious stance this morning, with equity markets generally lower and stock futures pointing to a negative open, as news is digested that the world's largest stimulus package is working but at a slower pace than imagined,” she wrote.

The news from China was generally positive, with the trade balance and industrial production each expanding, but some reports failed to match optimistic expectations. On the bright side, Japan’s Nikkei index hit a 10-month high. 

As equity futures move lower, Treasuries are on the rise ahead of a record $37 billion auction in 3-year notes. Today’s auction will be followed by a debt sale of $23 billion in 10-year bonds Wednesday followed by an additional $15 billion in 30-year bonds on Thursday.

Key Releases Today:

8:30 ― With fewer workers and little pressure on wages, it’s no surprise the second-quarter report on Productivity & Costs is expected to show productivity rising faster than unit labor costs. 

Analysts expect that productivity advanced 5.5% between April and June, compared with just +1.6% in Q1, while unit labor costs likely gained 3.0% after falling 2.8% from January to March. 

In other words, the economy is producing more per worker hour; the caveat is, of course, that there are fewer workers. As the Wall Street Journal put it this morning, the report offers one explanation as to “how so many companies managed to trounce earnings expectations last quarter despite the recession.”

Some of this report’s details were already released in the GDP report, so there should be little room for surprises.

“Productivity's strong second quarter performance reflects vigorous cost cutting that has supported profits,” said IHS Global Insight. “Gains in the third quarter may not be as strong, but still be respectable and should provide further support to corporate earnings momentum.”